The New Golden Age of Banking

Dear Rich Lifer,

The banking industry has changed a lot over the last 50 years. 

Until the early 1980s, the federal government placed a cap on the amount of interest banks and credit unions could offer customers on their savings accounts. 

To get around this regulation and be able to compete with money market fund interest rates, banks started giving away small appliances like toasters and waffle irons to attract deposits.  

It wasn’t until 1982 when Congress passed the Garn-St. Germain Depository Institutions Act, which allowed banks and credit unions to offer money market accounts that paid a “money market” rate, which was higher than the previous capped rate, that free toasters started to disappear. 

Some believe this spelled the end of the golden age of banking. Not only did banks get rid of the free toaster, which became ubiquitous with opening up a new savings account, but the free checking account seems to have gone by the wayside as well.

Nowadays if you sign up for a new account, you’re more likely to be handed a pamphlet with all kinds of complicated fees and contingencies tied to your account.  

We get into the implications of this, and what you should be aware of in your bank accounts today… 

Did Banks Get It Right in The ‘70s? 

A recent Bankrate survey found only 39% of Americans today can cover a $1,000 emergency expense. That figure is down from 41% in 2020. 

Although several American households were able to stockpile savings because of less travel, work from home, and fewer entertainment expenses due to the pandemic, millions of others lost jobs or received pay cuts, which have put them on a downward slide. 

Older Americans seem best prepared to pay for unexpected expenses, with only a third of Millennials (aged 24-39) able to afford it. That’s compared with 46% of Gen Xers (aged 40-55) and 45% of Baby Boomers (aged 56-74).

The hardest hit are those in lower-income households. Only 21% of those earning less than $30,000 a year can cover emergency costs with savings, while 58% of those earning $75,000 or more per year have the money available.

The free toaster might have been a played-out marketing gimmick of the ‘70s, but it effectively incentivized Americans to open savings accounts and save more money. 

Today, you’ll be hard-pressed to find a bank giving away small kitchen appliances for opening a new account, but what does remain are high-interest money market accounts. 

What is a Money Market Account? 

Not to be confused with money market mutual funds, a money market account (MMA) is an interest-bearing account held at a bank or credit union. 

One of the allures of MMAs is they offer higher interest rates than savings accounts. For example, in July 2020, the average interest rate was 0.08% on an MMA, while the average savings account paid only 0.06%. 

The highest money market account rate last year was 1.50%, while the highest savings account rate was 1.15%.

When interest rates are high, like in the 1980s, 1990s, and most of the 2000s, the gap between MMAs and savings accounts widens. 

Because MMAs can be invested in certificates of deposit, government securities, and commercial paper, they’re able to offer higher interest rates than regular savings accounts. 

Another advantage MMAs offer is they provide federal insurance protection, whereas money market mutual funds generally do not. An MMA opened at a bank is insured by the Federal Deposit Insurance Corporation (FDIC). 

The FDIC covers up to $250,000 per depositor, per bank, or up to $500,000 for joint accounts. However there is one caveat: if the depositor has other insurable accounts at the same bank (checking, savings, CDs, etc.) they all count toward the $250,000 limit.

And lastly, unlike savings accounts, most MMAs offer check-writing privileges and offer a debit card similar to your regular checking account. 

Disadvantages of MMAs

You’re probably wondering what’s the catch with MMAs? 

The main cons to opening an MMA are limits on the number of transactions, account fees, and minimum balance requirements. 

For instance, the government limits only six transactions per statement cycle in an MMA, whereas money market mutual funds have no limits. We’ll explain why this is really a pro and not a con at the end. 

Most MMAs can be opened for $100, usually required as a minimum deposit. But some MMAs require a minimum balance to be kept, usually anywhere from $500-$5,000, or insufficient balance fees will be incurred. 

Aside from these minor disadvantages, there’s really no reason why you shouldn’t consider opening an MMA today. 

5 Reasons to Open an MMA 

If you’re still on the fence, consider these five points for opening an MMA: 

Accessibility to funds – You can withdraw or transfer money at any time for any reason without incurring a penalty. The only caveat is you’re limited to six withdrawals per month by law. But, ATM withdrawals and withdrawals through a bank teller at a branch don’t count toward your limit. 

Higher interest rates – Traditionally, MMAs have returned higher interest rates than savings accounts. But make sure you shop around. The average MMA is a low 0.24%, yet there are institutions paying up to 1.75% and higher in 2021. 

Check writing – Unlike savings accounts, MMAs offer check-writing privileges. This flexibility and liquidity make an MMA more attractive than most other savings products. 

Security – As we said earlier, MMAs opened at banks are FDIC-insured up to $250,000 per depositor or $500,000 for joint accounts. If you open an account with a credit union, look for insurance to be provided by the National Credit Union Share Insurance Fund (NCUSIF).

ATM access – Not all MMAs offer ATM cards, but a lot do, and it’s a great perk since ATM withdrawals don’t count toward your six withdrawal limit. 

Finally, one of the knocks to MMAs has always been the government-regulated transaction limit, which we explained earlier. In our opinion, this is less of a disadvantage and more of an advantage. 

The reality is Americans struggle to save money. If an MMA limits your withdrawals to only six transactions per month, this could be enough incentive to stop touching your savings and find other means to fund purchases.

To a richer life,

The Rich Life Roadmap Team 

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